Economics of Oil and Fruit Roll-Ups

In the first grade, my favorite part of my lunch was Fruit Roll-Ups. My Mom used to call them fruit road kill, but to my first grade taste buds they were a gourmet fruit treat. I quickly learned that my consumption of fruit rolls ups could not exceed my supply. I had two primary supply sources of Fruit Roll-Ups:

non-domestic supply: those Fruit Roll-Ups that I gained from other sources, primarily through purchase or barter transactions with classmates.

Obtaining Fruit Roll-Ups up from sources other than my Mother was expensive and unreliable. When supply for barter was available I would offer a cookie for an orange flavored fruit roll up or my place in line at the handball court for an apricot fruit roll up (my favorite flavor). My Mother’s nurturing nature made domestic supply the most stable source of Fruit Roll-Ups. I could rely on that one Fruit Roll-Up to always be in my lunch box. I understood at a young age the hazards of upsetting my Mother, who among countless other things, could affect a disturbance of my stable domestic source of Fruit Roll-Ups I knew that if that source was upset I would need to work hard to increase non-domestic supply or inevitably reduce consumption. Stated in its most simple terms, my consumption of Fruit Roll-Ups could not exceed my supply . Given that: CFR = my consumption of Fruit Roll-Ups FRmom = Fruit Roll-Ups supplied by my Mom FRclassmates = Fruit Roll-Ups obtained through barter with classmates Then: CFR = FRmom + FRclassmates I learned this simple truth of the relationship between consumption and supply at a young age. And every day as an adult I deal with the economic reality that my consumption of the things that I need or want cannot exceed my supply. If one source of supply of anything I desire diminishes, I have no choice but to find a way to increase supply from other sources or reduce consumption. The Fruit Roll-Up analogy might have been a long winded method to summarize this formula, but something inside of me just felt like blogging about Fruit Roll-Ups today. This same rule of supply and demand applies to our nation’s supply and use of oil. The nuances of the economics of oil are substantially more complicated that those of Fruit Roll-Ups. Oil supply and demand is impacted by a variety of domestic and global economic, social and political factors. While these factors may resemble school yard economic, social and political factors, they are more complex if for no other reason than because of the amount of money and people involved. But the fundamental restriction that consumption cannot exceed supply holds true. ((ignoring the impact of stock piles or borrowing.)) To revisit my first grade mind’s formula: Given that: Co = National oil consumption Sd = domestic supply of oil Sf = foreign supply of oil Then: Co = Sd + Sf

Recent Events

On April 20th, 2010, the Deepwater Horizon offshore oil drilling platform experienced an oil well blowout and gushed millions of gallons of oil into the Gulf of Mexico. As of the date of this posting, the stream of oil has yet to be fully contained. As a result, there has been a significant decrease in public support for offshore drilling:

“Americans’ support for increased offshore drilling has declined significantly since April, to the point that the public is now about evenly divided on the issue. President Obama’s decision to extend the moratorium on new offshore drilling is now more in line with Americans’ — and particularly Democrats’ — current views on drilling after the oil spill than before it, when Obama called for more drilling.” ((http://www.gallup.com/poll/137885/Americans-Divided-Increased-Coastal-Oil-Drilling.aspx))

A CNN opinion poll on June 16th shows a sharp decline in the number of respondents that indicated favor of oil drilling and a sharp increase in those indicating opposition to oil drilling.

Revisiting the Equation

The US Department of energy is forecasting increased oil consumption in the US. ((http://www.eia.doe.gov/steo/gifs/Fig15.gif)) If oil consumption increases, then oil supply must also increase. ((Again, for the sake of simplicity I’m ignoring the tentative impact any oil reserves may have on this equation)). If growth in oil supply from offshore drilling is less than or equal to zero, the oil supply from other sources must increase. This means increasing non-offshore drilling domestic oil production or increasing oil imports.

This is not to suggest that offshore oil production should or should not be constrained. Images in the media of oil slopped birds and beaches and struggling fishermen are powerful reminders of the costs of offshore drilling. But any desire to constrain offshore drilling should made with a conscience effort to balance the costs of offshore drilling with the costs of alternatives; some combination of a reduction in oil consumption or increase in other oil supply.

Recency Effect

Human’s have a tendency to give higher weight to recent observations than more distant observations. Psychologists refer to this as the recency effect. ((http://en.wikipedia.org/wiki/Recency_effect)) With images of a region devastated by oil slick fresh in mind, the human brain may discount competing concerns connected to more distant memories. For example, one might feel a diminished sense of distain from more distant events such as $4.00 plus gasoline prices that occurred in 2008, the oil crisis of 1973 resulting from the OAPEC’s embargo restricting supply from a region that the US had come to rely on and other historical global conflicts and environmental issues related to foreign oil production. The recent disfavor for offshore drilling represents a change of mind from the summer of 2008, when amid high gasoline prices, a Gallup poll showed the majority of respondents in favor of expansion of offshore drilling. ((http://www.gallup.com/poll/108121/majority-americans-support-drilling-offlimits-areas.aspx))

Again, this observation does not amount to an argument that offshore drilling should or should not be constrained. And the observation that recent disfavor for offshore drilling could be a result of the recency effect alone does not warrant a conclusion that such disfavor is in fact a result of the receny effect. Is the recent disfavor for offshore drilling a conscious response to the revelation that offshore drilling poses risks to which people were previously ignorant? Or is the current disfavor for drilling an example of receny effect? Will the disfavor for offshore drilling persist in the years to come as future events such as high oil prices or political tensions highlight competing concerns? Should expectations that legislators adopt policy in response to current events be tempered in light of the possibility that the desire of the people may be a tentative reaction to those events?